SEC's AOL Probe Focuses on Colburn

David Colburn, the former AOL Time Warner executive in charge of deal making at the Dulles, Va.-based online division, is the initial focus of the Securities and Exchange Commission’s (SEC) probe into AOL’s accounting practices. Last week, AOL forced Colburn out of the company, literally locking him out of his office.

According to the Wall Street Journal, the SEC has already issued subpoenas for documents involving the advertising and marketing deals spearheaded by Colburn. The Journal story comes one day after AOL/TW revealed that it may have overstated revenue by $49 million within its struggling AOL division.

The company said it discovered the accounting problems on three transactions about 10 days ago and was in the process of reviewing the sales as well as other transactions involving the AOL division’s advertising and commerce revenues over six quarters. The period is from late in 2000 through March of this year.

AOL also said it was restructuring Colburn’s former division, which was famed for driving hard bargains when the online service was riding high, to reduce the current 90 employees to as few as 10. AOL did not announce any layoffs, only saying the displaced employees will be transferred to other AOL/TW divisions. AOL executives said online-advertising sales are likely to be removed separated from business-affairs deals.

The SEC probe, which has widened to include the Department of Justice, was triggered by two articles in The Washington Post that first raised questions about how the flagship ISP booked revenues from advertising deals.

Colburn was seen by many as a hard-charging executive who negotiated many of America Online’s biggest advertising and marketing deals that are now under scrutiny. The Post articles referenced hundreds of pages of confidential AOL documents in its probe of whether the company boosted revenue through a series of unconventional deals from 2000 to 2002.

Although the company defended its accounting practices as proper after the articles appeared, the latest disclosure about the revenue appeared to be similar to those discussed in the Post articles. However, an unidentified source told the newspaper that none of the three deals it flagged were part of the newspaper’s articles.

Despite the disclosure about the $49 million it may have overstated and the company’s ongoing internal investigation into AOL’s accounting on other deals, CEO Richard Parsons and CFO Wayne Pace Thursday signed off on the company’s financial reports in compliance with a new SEC order under the Sarbanes-Oxley Act of 2002, which requires CEOs and CFOs to certify that the financial information they file with the SEC “fairly” represents their company’s true financial condition. But the company said it may also have to restate its revenues once its internal probe of the AOL division is concluded.

In a statement Parsons said, “I consider the accuracy of AOL Time Warner’s financial reporting to be one of my most important responsibilities, and I am committed to giving investors accurate and transparent information about the company.”

The Sarbanes-Oxley Act of 2002, which was signed into law on July 30, includes changes to existing securities regulations that propose fines of $1 million and/or up to 10 years in jail if officers of US public companies “knowingly” certify false financial information in their public documents. If the violation is “willful” the new law calls for a fine of $5 million and/or up to 20 years in jail.

AOL has also hired the law firm Cravath, Swaine & Moore to help it with its internal investigation into the AOL division’s accounting on deals.